The wait is over, and the results are in. Last Thursday and Friday, the U.S. Supreme Court issued its rulings on two cases with enormous implications for employee benefit plans.
King v. Burwell: Federal Exchange Subsidies Affirmed
At issue was Section 1401 of the ACA, which states that the premium tax credit is available for individuals enrolled in an Exchange “established by the State.” IRS regulations nonetheless extend the availability of these subsidies to coverage obtained on the federal Exchange “because it is consistent with the language, purpose, and structure of…the Affordable Care Act as a whole.” See our October and December newsletters for more details on the case history.
Only 16 states (plus D.C.) have established a state Exchange (e.g., Covered California). The remaining 34 states have relied on HHS to operate their Exchange through healthcare.gov. There are approximately eight million enrollees in the federal Exchange whose subsidies were in jeopardy. If eliminated, premiums were estimated to increase an average of 35%-47%, and residents of such states generally would not be subject to the individual mandate or be able to trigger pay or play penalties for their employers.
Chief Justice Roberts wrote the Court’s opinion, finding that Congress intended for subsidies to flow on the federal Exchange. He stated that the “Affordable Care Act contains more than a few examples of inartful drafting,” and that the Section 1411 provision at issue is “ambiguous.” He further reasoned that the Court cannot interpret the provision to exclude subsidies on the federal Exchange “because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.”
Justice Scalia predictably issued a spirited dissent, referring to the majority’s decision as a “bit of interpretive jiggery-pokery.” He concluded with a bang by stating that when this decision is viewed together with the Court’s 2012 companion decision to uphold the individual mandate, “[w]e should start calling this law SCOTUScare.”
Bottom Line: Status quo. Exchange subsidies continue to be available nationwide for qualifying individuals, and therefore employees in all states can trigger pay or play penalties.
Obergefell v. Hodges: Same-Sex Marriage a Constitutional Right in All States
The Court’s 2013 ruling in United States v. Windsor held that key portions of the Defense of Marriage Act (DOMA) are unconstitutional, and therefore the federal government must recognize same-sex marriage for purposes of federal law. However, it did not resolve key remaining issues under state law. See our previous alert of the complex state income tax issues this raised for employee benefit plan sponsors.
On Friday, the Court concluded that the Fourteenth Amendment provides a constitutional right to same-sex marriage that requires states to issue same-sex marriage licenses and recognize same-sex marriages lawfully entered into outside of the state. This means the 14 states that prohibited same-sex marriage prior to the ruling can no longer enforce the bans.
Note that Friday’s ruling does not affect domestic partnerships. This means that the federal government still does not recognize domestic partners as spouses. Although an employee may have entered into a registered domestic partnership (RDP) in a state that provides the same state income tax exclusion for RDPs as spouses (e.g., California), the employee will still be subject to imputed federal income and post-tax payment for the domestic partner’s coverage. The only exception is if the domestic partner is a federal tax dependent.
Bottom Line: Discard your lists of states that recognize same-sex marriage—it’s now the law of the land. Furthermore, we now have both federal and state income tax uniformity for providing tax-advantaged status to same-sex and opposite-sex marriages in all states.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).